Upfront cash and cashflow from Apple’s rumored iPhone in China deal

Washington Post’s Tameka Kee reports that Apple’s rumored 5 million iPhone sale to China Unicom will generate about $100 per unit in profit for Apple. Kee states that this is less than the estimated $400+ per unit that Apple now gets on its deal with AT&T. My reaction … “Um, yeah … no kidding” … We’re not on a level playing field in China. We need to get a toehold in China, with some 700 million wireless consumers, and then go from there. Besides this deal is far more profitable than the initial margin calculations suggest.

Let’s do a quick breakdown … iSuppli has a BOM estimate of $178.96 for the iPhone 3GS. The report from CBN states that Apple’s iPhone deal with China Unicom is for 5,000,000 iPhones purchased upfront for $1.46 billion. That’s $292 per unit less the $178.96 = $113. But there are other variables to consider. Apple will almost certainly NOT be providing China Unicom with the standard iPhone 3GS model. The special model for China will likely be the new model A1324 and it will likely cost less to build and distribute. If numerous reports are to be believed, this model will not include WiFi (a $5 to $10 savings per unit). Moreover, it is likely that China Unicom will cover virtually all shipping, marketing and distribution expenses associated with a China iPhone launch. So you can knock off another $18 to $25 per unit in expenses that Apple would normally incur.

Whether Apple will receive ongoing App Store and iTunes revenues under this China deal is a large question mark? Pure conjecture on my part, but I would not be surprised to learn that Apple has assisted China Unicom with the development of a China Unicom branded version of Apple’s App Store and iTunes. A bit more background and flat out guesswork …

Li Yizhong - MIIT VM

Apple’s China iPhone negotiations have ostensibly been with potential carrier partners (first China Mobile and later China Unicom), but the watchful parent has always been in the background whispering instructions into the child’s ear. It is my view that China’s Ministry of Industry and Information Technology (MIIT) has had the final say on the iPhone deal terms. And it’s apparent that China’s MIIT has no intention of allowing Apple, or any handset manufacturer for that matter, to capture substantial wireless value added services (WVAS) revenues that China feels belong to its indigenous carriers. Consequently, to get any iPhone deal done in China, Apple may have been required to give up a large portion of revenues from the Apple iPhone platform (iTunes and App Store). That does not mean “no apps” or music for China iPhone owners. It just means a different platform, one with China Unicom’s brand. This will likely be a cloned version of Apple’s platform designed by Apple for China Unicom. I believe that Apple will be (shhhh … quietly) “cut in” for a certain percentage of WVAS revenues despite all of the posturing in the China tech press that “Apple will forego its revenue sharing model.” Since saving face is very important in China, I expect that Apple will not publicly disclose any assistance they may provide to China Unicom in developing their special iPhone WVAS platform, and nor will they publicly identify (break out) revenues from this WVAS partnership.

As with most Apple ventures, the iPhone deal in China will prove to be handsomely profitable and cash will continue to accrue to Apple’s bottom line … starting with a cool $1.46 billion up front!

5 million iPhone package sale to China Unicom? Carrefour to be a key iPhone distribution partner?

Update – August 13, 2009: According to the Associated Press, China Unicom spokesman Yi Difei has denied the reports of an iPhone deal and large iPhone pre-purchase. Yi Difei stated “The report is not true.”… “There are all kinds of possibilities. There is no particular timetable for the talks.” Despite this denial, Zhou Fang, the CBN reporter who broke the story, discounts the China Unicom denial and noted that he had made audio recordings of the interviews with the Guangdong Unicom executives (Zhou Youmeng and Yu Zaonan) who spilled the beans.

Adding further legitimacy to the original CBN report is a post today on Interfax TMT and the news today from a Carrefour source. Chongqing Evening News, quoting a Carrefour employee, states that the iPhone in China deal is a go and Carrefour would indeed be part of the distribution plan. The report states that iPhones could be ready to go on sale as early as late August and that Carrefour stores in Guangzhou and other costal areas have begun preparing store displays.

August 11, 2009: According to an August 11 report in China’s CBN.com(China Business News), China Unicom has agreed to pre-purchase for inventory five million (5,000,000) special “for China” iPhones from Apple. The report states that China Unicom will pay Apple 10 billion CNY (USD $1,463 billion) or 2,000 CNY (USD $292.60) per unit, and that China Unicom will have a 3-year iPhone exclusive in China. CBN cites Guangdong Unicom’s Deputy General Manager Zhou Youmeng, as a prime source for this story.

Guangdong Unicom is a subsidiary of Beijing-based China Unicom. China Unicom’s subsidiaries are often quite independent and don’t always check with the parent in Beijing before launching marketing initiatives or speaking (leaking) to the media. Shanghai Unicom had their wrist slapped rather severely for comments to reporters re the rumored “iPhone deal” and for their publication of iPhone images on their subsidiary website back in March. It will be interesting to see how Beijing handles this latest leak by the Guangdong subsidiary. NOTE: Guangdong/Canton is China’s most populous region with over 150 million people.

CBN reports that China Unicom employees have been training on thenew model iPhone for China Unicom and it will be ready for launch in September. CBN also claims that Carrefour (134 superstores in China) will be a key iPhone distribution partner in China.

Marbridge Consulting reports that the new model iPhone for China was spotted by reporters attending the signing ceremony for China Unicom’s agreement with Carrefour. The new iPhone was apparently on hand as one of several 3G handsets that will be sold for China Unicom through Carrefour superstores.

Another source for the story, Yu Zaonan, a manager in Guangdong Unicom’s individual client department, stated that the iPhone will be priced at 2,400 CNY (USD $351) for an 8GB iPhone and 4,800 CNY ($702) for the 16GB model. Zaonan qualified his comments to CBN by stating that this plan was contingent on the formal signing of the deal by Apple and China Unicom in Beijing.

With Greg Joswiak’s (Apple VP for iPhone Product Marketing) very recent trip to China, it appears that the “iPhone in China” deal may soon become more than just a hot rumor. 5 million iPhones will be, by far, Apple’s largest single iPhone package sale.

Piper Jaffray Analyst Gene Munster appeared on CNBC’s Fast Money program today (July 7). See video below. Discussion of Apple (AAPL) begins about halfway through the video. According to Piper Jaffray’s channel checks iPhones and Macs are selling well and should have a favorable impact on Apple’s (AAPL) earnings. As Munster puts it: “There’s no question that now is a good time to own Apple (AAPL) … June is going to be good, but September and December are going to be huge for these guys (Apple) … iPhone apps are like a boa constrictor, these apps on the iPhone are slowly squeezing the life out of the competition … This is going to be a strong back-half of the year for Apple (AAPL).”

Munster suggested that Apple’s recent decision to cut Macbook prices was a smart business move. He noted that inventories are low and believes that Apple sold at least 2.2 million Macbooks during the third quarter. According to Munster: “We track product lead-times and our records show that Apple has never had a 7-10 day delay on its most popular 13″ model, with the most recent significant delay being 5-7 days over 2 years ago in 9/08.” …”We see this as a sign that demand is outpacing the company’s build expectations, and it may take several weeks to reach a supply demand equilibrium.” Vodpod videos no longer available.

Beijing. June 26. INTERFAX-CHINA – A China Mobile employee has called for a united front between the country’s three telecom operators in order to challenge Apple’s precondition on any iPhone deal with operators that it retain a high proportion of the revenues from the sale of iPhone applications.

Huang Yan, manager of the planning section of China Mobile’s business support department, said that Apple’s insistence on taking a large share of revenues from the sale of iPhone applications is a “threat to the value chain of China’s telecom industry.”

Yan added that China Mobile ended negotiations with Apple due to Apple’s demands for a high proportion of revenues from application sales.

“Although the three operators in China are competitors, we should be unanimous when our business model is being challenged,” Huang said.

China Unicom is currently in talks with Apple over offering iPhone services in China. However, sources at China Unicom have told Interfax that the revenue-sharing plan being offered by Apple is below the operator’s bottom line.

A Wi-Fi-disabled version of the iPhone is in the process of getting a network access license from the Ministry of Industry and Information Technology (MIIT).

iPhonAsia’s response to Interfax Article:

Hi Cindy,

I love the opening quote in your article:

“A China Mobile employee has called for a united front between the country’s three telecom operators in order to challenge Apple’s precondition on any iPhone deal with operators that it retain a high proportion of the revenues from the sale of iPhone applications.”

This sounds like a jilted “love interest” (China Mobile) who wants to throw a cold pale of water on a new blossoming romance between Apple and China Unicom.

Not only does it sound petty, but in many parts of the world, when companies conspire to fix pricing, that’s a violation of anti-trust laws. While China Mobile’s Huang Yan does not appear to be demanding fixed pricing, it’s somewhat perplexing that he is calling on all three major telecom operators to come together to challenge Apple. Huh?! Last time I checked, Apple has not yet sold one “official” iPhone in the People’s Republic of China.

Why would Apple, with 0% “official” market share, be perceived as such a threat to China Mobile? It’s really a rhetorical question … I know the answer. This campaign against Apple’s revenue model is really just a subterfuge. This is a power struggle between carriers and all smartphone manufacturers who might dare challenge the monopoly of the carriers. While Nokia and other original equipment manufacturers (OEMs) sell tens of millions handsets in China, they cannot yet match Apple’s platform or value proposition.

Right now Apple has the most compelling products (iPhone and iPodTouch) and a wildly popular value-added services platform (iTunes, App Store, OS 3.0 and regular “free” software upgrades for iPhone and nominal fee for iPod Touch). If Apple’s wireless value added services win the populatiy contest, then carriers might be perceived as “dumb pipes.” Hence, I see today’s quotes from Huang Yan (China Mobile) has a tactic strait from the Sun Tzu’s “Art of War.” Instead of going to battle against all competing tribes (Nokia, RIM, Palm, HTC, etc.), pick out the most serious treat to dominance, and crush them, thereby instilling fear in all others who would dare to pose a challenge.

But is Apple really posing a threat to carriers’ value chain? I would say no! Emphatically no! The reality is that carriers are not precluded from imitating Apple’s game, as long as they respect Apple’s intellectual property. And imitation is exactly what they are doing – China Mobile with their OPhones and OPhone OS (Android-based) and Mobile Market … and China Unicom with their UPhone (also Android-based) and UniPlus OS and their own app store. The difference is that China Unicom is going to follow the path of “coop-a-tition” (cooperation + competition) while China Mobile is apparently doing what they can to torpedo Apple’s budding relationship with China Unicom.

I am actually somewhat amused to see China’s dominant carrier (China Mobile) in such tizzy that they would send out a manager (Huang Yan) to attempt create controversy; “it’s us against Apple.” Perhaps this is more a reflection of China Mobile’s anxiousness over China Unicom’s WCDMA 3G? There are now well over 1,000,000 iPhones running on China Mobile’s EDGE 2G network. Many of these will be ripe targets for upgrade to WCDMA 3G on China Unicom’s network.

In the second to last sentence in today’s report, you noted that; “China Unicom is currently in talks with Apple over offering iPhone services in China. However, sources at China Unicom have told Interfax that the revenue-sharing plan being offered by Apple is below the operator’s bottom line.”

Interesting information. I suspect this may be somewhat of a face saving quote from China Unicom. They do not want to be perceived in the industry as having given up too much in their negotiations with Apple.

“Apple Inc. has agreed to grant China Unicom the majority share of revenues from its App Store as part of ongoing discussions between the two parties regarding the introduction of the iPhone to China, a China Unicom source told Interfax on April 7.”

So now I wonder which China Unicom source is/was correct? The source quoted on April 7, who revealed that an agreement on App Store revenue sharing was complete? Or the source today, who now suggests the revenue-sharing plan being offered by Apple is “below the operator’s bottom-line?”

If your April 7 report is accurate, Apple has already agreed to give a “majority share” of App Store revenues to China Unicom. Where will this majority share come from? There are three hungry people at the table – Apple, China Unicom and Developers – and the pie can only be sliced so many ways. Apple may giving up some of its 30% share and/or developers may need to take a less than 70% share. If your latest (today’s) report is true, then China Unicom may be angling for an even greater slice of the pie. I suspect this “pie allocation” has already been settled per your original April 7 report. I further suspect that China Mobile is just kicking up dust today in the hopes that they can embarrass Apple and China Unicom.

As far as the “fairness” of Apple’s app revenues share split … I would point out that there are very different cost-to-value propositions between Apple’s App Store and China Mobile’s new Mobile Market app store.

A bit of background …

China Mobile’s app store (Mobile Market) remains under development and will likely launch with only a fraction of the apps in Apple’s China App Store. How enthusiastic is China’s developer community to build for Mobile Market? In May, China Mobile announced their decision to share only 50% of Mobile Market revenue with developers while retaining a full 50% share for themselves. Many developers have quietly grumbled that this split is unfair. By comparison Apple’s model gives a full 70% share to developers (albeit this may be different in China). In addition to a smaller slice of the revenue for developers, Mobile Market developers will also need to work harder if they hope to make decent money on their apps. They will need to code apps for each mobile operating system (China Mobile’s OPhone [Android-based], Win-Mobile, Symbian, etc.). It is also my guess that China Mobile will need to subsidize some of the app development on Mobile Market. Hence their actual revenue share may wind up being less than the advertised 50%.

While it has not been discussed publically, China Unicom will almost certainly utilize Apple’s China App Store (versus their own “under development” app store) for delivery of apps and games to iPhone owners. Thousands of iPhone apps are already “good to go” on Apple’s China App Store. This is relevant has there are far fewer costs, if any, to be borne by China Unicom. Developers too will find the iPhone 3.0 SDK a pleasure to work with, and they can take advantage of “in app” purchases, subscriptions and integration with hardware devices to boost their revenues.

Apple’s App Store in China is a proven quantity. iPod Touch owners in China are already downloading apps and there is no complex build or ramp-up stage in order to launch for iPhone owners in China. The point being that it is hard to find justification for China Unicom’s demand for a greater than 50% share of Apple’s App Store revenues. I am certain that there are other rationales for China Unicom seeking out more revenue (e.g. to offset subsidy payment [if any] to Apple). China Unicom may also be looking to squeeze more reveune as they will need to price the iPhone competitively in PRC in order to effectively shut down grey market smuggling of iPhones into China. Competitive pricing may be even more important if WiFi is disabled on the official iPhone. It should be noted, that notwithstanding the grey market origin, Apple makes money on each “real” iPhone sold in China.

In the final analysis, I suspect China Unicom’s share of App Store revenues (likely finalized back in April) will turn out to generate more in bottom line revenue than the 50% share that China Mobile will take from Mobile Market.

Thanks again Cindy for your good reporting on Apple and iPhone in China negotiations.

It was revealed on Friday that Steve Jobs had a liver transplant back in March. After a several months of recuperation, Steve Jobs will soon return to work at Apple. Story over, move on! Steve is … and so are Apple (AAPL) shareholders.

Alas, no … the sanctimonious financial media, once again, trotted out their legal beagles to weigh in on “ethics” and “disclosure responsibility” of Apple Inc. surrounding Steve Jobs’ health status. Never mind that Apple went to great lengths in January to explain that new tests revealed that Steve Jobs’ hormonal imbalance (causing his weight loss) was more complex than first thought … and that based on this new medical information, Steve would need to take a 6-month leave of absence. Okay … we all know about Steve’s past Whipple procedure and islet cell neuroendocrine tumor treatment. Given the new revelations in January, and Steve’s need to take a leave, AAPL shareholders understood that Jobs’ condition was not trivial. Clear message sent. AAPL shareholders understood that this was a serious situation that needed Steve’s focus and full attention from his medical team.

Apple COO, Tim Cook

As an Apple (APPL) shareholder, I can say “we get it,” and we respect Steve’s right to privacy during this leave of absence. The only ones freaking out are the pretenders. Serious AAPL investors are very comfortable with Tim Cook and the rest of Apple’s deep bench (Peter Oppenheimer, Jonny Ive, Phil Shiller, Ron Johnson, Scott Forstall, Bob Mansfield, Mark Papermaster, Dan Cooperman, Bernard Serlet, Sina Tamaddon, et. al.). Moreover, select members of Apple’s Board have been consulting with Steve’s doctors and closely monitoring Jobs’ health status. Finally, whether Steve Jobs moves to a less than full-time role (e.g. moving to Chairman with Cook as CEO) or not, Jobs’ DNA is deeply embedded in the company and Apple’s product menu is well defined for years to come.

To the “slimebucket” posers that continue to scream over inadequate disclosure (daily Tweets from Steve Jobs’ doctors would not be enough due to 140 character limit), I say you are not speaking for AAPL shareholders (certainly not this shareholder). You are, in fact, doing the dirty work for Wall Street’s “shoot first” traders, and “sue always” lawyers.

Here’s my favorite quote of the day courtesy of kylobbist over on AAPL Sanity …

“So let me get this straight … The Masters of the Universe on Wall Street, along with the executives and boards of the major banks and investment firms basically were running a big ponzi scheme among themselves and screwed the markets, the economy and their customers, which required a massive and unprecedented infusion of taxpayer dollars to save their hides along the way … but we are supposed to be outraged at the “ethics” and “immorality” of whether and how Steve Jobs got a liver transplant??? … Yeah, whatever”

CNBC’s Jim Goldman has an interesting post on Tech stocks and Apple (AAPL) today. He looks back at the flip flop analysts’ earnings and price projections for Apple (AAPL) and briefly reports on expectations for a new iPhone that many be unveiled at the forthcoming WWDC keynote on June 8. This is also a venue where we might hear about an iPhone deal with China Unicom.

Regular iPhonAsia readers know we’ve been very critical of RBC’s Mike Abramsky and Morgan Stanley’s Katie Huberty. Both analysts have now had their Ebenezer Scrooge Christmas morning awakening and reversed their bearish calls on AAPL. All we can say is what took them so long? See iPhonAsia’s poll > HERE

TechCheck Excerpt:Covering Apple can be fun, in a nauseating kind of way: Consider RBC Capital’s Mike Abramsky earlier this year who did a whiplash-inducing about-face after essentially rating Palm a “buy,” and Apple a “sell.” He stepped up, admitted he was wrong, and upped Apple to a “buy,” and dramatically increased his targets. Read More

No new iPhone unveiled at WWDC (but iPhones [plural] to be unveiled soon thereafter)

No surprise Steve appearance at WWDC

Multiple iPhone models (high end and a lower cost model)

Official iPhone in China as soon as the end of summer ’09

Steve Jobs may return to Apple in a Chairman’s role with Tim Cook as CEO

iPhonAsia comment: Most Apple watchers are expecting a new iPhone unveiling at the June 8 WWDC Keynote. Munster may raise a few eyebrows with his prediction that Apple will hold off on the new iPhone(s) “show and tell” for a few more weeks. But this should not be too much of a surprise as Apple has made it clear that they are moving away from important product unveilings at major conferences (e.g. MacWorld & WWDC) in favor of more focused “special events.” These events are more secure (no rehearsal peek-a-boos from outsiders and media) and choreographed and can be held at Apple’s Cupertino headquarters or at the Mascone Conference Center.

WWDC Keynote Will Be Delivered By Phil Schiller; Jobs Likely Absent. Earlier today (5/13) Apple announced that Phil Schiller, not Steve Jobs, will deliver the keynote for the WWDC event on 6/8. This is consistent with our expectations as well as Apple’s indications that Steve Jobs is still planning on returning to the company “at the end of June” (emphasis added). In order for Jobs to deliver the keynote on 6/8, he would likely begin preparations well before his intended return date.

What We Expect To See (And Not See) At WWDC; No New iPhones. As indicated in today’s press release, we believe Apple will focus on the new version of Mac OS X, Snow Leopard at WWDC. While some investors may be expecting Apple to launch redesigned iPhones at WWDC, we do not anticipate the launch in early June. Rather, we expect Apple to host a special event in late June or early July to launch a family of iPhones.

We continue to expect multiple models, possibly a high-end iPhone with improved specs from the current version and a low-end version with lower capacity and fewer features along with a reduced pricing plan. Such a model could also be used in Apple’s launch of the iPhone into China as soon as the end of summer ’09.

Our Take On Steve Jobs’ Return To Apple. Apple continues to expect the return of Steve Jobs by the end of June (likely implying after WWDC). Until then, it appears that day-to-day operations at Apple are running smoothly. We believe Jobs may return to Apple with a reduced role, possibly as chairman, with COO Tim Cook assuming the CEO position. Regardless, we think the transition of leadership during and after Jobs’ leave of absence will not negatively impact Apple’s business.